FM-AA-CIA-15 Rev.

0 10-July-2020

Study Guide in (Course Code and Course Title) Module No._2_

SSE 106 - Microeconomics

STUDY GUIDE FOR MODULE NO. 2

Basic Economic Problems and Economic Systems

MODULE OVERVIEW

Module Outline
A. The Basic Economic Questions
B. Basic Decision Problems
C Types of Economic Systems

Introduction
This particular module focuses on the three fundamental questions in Economics, which are the
concerns of every economy and likewise makes a discussion of the various economic systems as they
respond to these questions.
The basic decision problems that households, firms, the government and society must consider in order
to properly manage their resources, are similarly discussed.

MODULE LEARNING OBJECTIVES

At the end of the module, students are expected to:

1. explain the fundamental questions in Economics;
2. cite examples on how different societies respond to the fundamental questions;
3. explain the basic decision problems;
4. identify the various economic systems with their corresponding features; and
5. cite the advantages as well as the disadvantages of each of the different economic systems

LEARNING CONTENTS (title of the subsection)

The Fundamental Economic Questions

To address the problem of scarcity and address the basic decision problems, the society must respond to
then three fundamental economic questions; viz:
1. What to produce – this is a question of the types of goods a society desires. Since resources are scarce,
no economy can produce every product desired by the members of the society; hence, a society must take
into account the resources that it possesses before deciding what goods or services to produce.

2. How to produce – is a question on the technique of production and the manner of combining resources to
come up with the desired output. Since a good can be produced with different factor combinations and
different techniques, the problem is which of these to use. A society must be able to determine whether to
employ labor-intensive or capital-intensive means of production.

3. For whom to produce – refers to the market to which the producers will sell their products. This is a
problem
since resources and goods are scarce and no society can satisfy all the wants of its people. Determining
the
“target market” of the goods and services being produced will help to understand consumption behavior
and
patterns.

The Basic Decision Problems

Resources, as we have learned are limited unlike our needs and wants which are unlimited and
multifarious. Since resources are not freely available, economics comes into play to assist individuals and
societies in making proper choice and in making decisions. For proper management of resources, society
must consider basic decision problems; namely:

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Study Guide in (Course Code and Course Title) Module No._2_

1. Consumption. The need to survive necessitates consumption of the basic needs of people. Members of
society have various needs and wants and they determine the types of goods and services they want to
consume and the corresponding amount of it that they should purchase and utilize. Consumption is the
basic
decision problem that the consumers must always deal with in their day to day activities.

2. Production. This problem is generally a concern of producers. They determine the demands of consumers
and decide how to allocate their resources to meet these consumers’ demands. Producers are faced with
the
choice of what technique of production to employ – whether capital-intensive technique or a labor-intensive
one.

3. Distribution. The problem of the distribution of goods and services is primarily addressed by the
government.
Proper allocation of resources should be done for the benefit of all the members of society. While equal
distribution of resources can hardly be achieved, the government can adopt measures so as to lessen the
gap between the rich and the poor. A more equitable distribution of resources can help in achieving this
end.

4. Growth over time. Societies continue to survive and they grow in numbers. People continue to consume
and demand for goods and services. The many changes taking place in the society affect the changes in
the
people’s demand for goods and services. The problems of choice, consumption, production and distribution
have to be seen in the context of how they will affect future events.

LEARNING ACTIVITY 1

Written Homework on Fundamental Economic Questions:

Respond to the following guide questions as a Written Homework to be submitted in your MS Teams.

1. Among the fundamental economic questions, which do you think is/are the most important and WHY?
2. Is there a difference between “equal distribution of wealth” and “equitable distribution of wealth”? Make
a brief explanation.

This homework shall be submitted through MS Teams.

LEARNING CONTENTS (title of the subsection)

Economic Systems

Economic System - a set of economic institutions that dominate a given economy with the aim of solving the
basic economic problems.

Functions of an Economic System

1. To produce the goods for the consumption of the population
2. To utilize the resources in efficient method of production
3. To employ the labor force in occupations where productivity is at optimum
4. To apportion the wealth and income available to everyone in an equitable manner

Types of Economic System

1. Traditional economy – an economy where production methods, exchange and distribution of income are
made according to customs and traditions. The traditional mode of social organizations in responding to the
problems of production and distribution of economic goods is based on ways, procedures and systems
which have been handed down from generation to the next. The problem of production is met by using
tradition as the mechanism in identifying which goods to produce, in assigning the task in the production
process, and in deciding the type of production technology to be used. Basically a subsistence economy,
production is shared within the community with members taking only what they need. This system does not

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provide new avenues for changes to respond to the needs of the time.

2. Capitalism - a system where the means of production are privately owned. It is also known by similar
names as a Market Economy/Free Enterprise Economy/Laissez-Faire Economy.
Laissez-Faire - connotes “let alone”

Features:
 The means of production are privately owned
 Minimum government interference
 Profit motive
 Economic freedom/consumer sovereignty
 Free competition
 Institution of private property
 Price mechanism determines prices

3. Communism - a system where the means of production and resources are owned, managed and
controlled by the state. It is also called a Command Economy.

Characteristics:
 presence of central planning
 no economic freedom
 private property is not allowed
 no profit motive as the interests of the state/people are promoted competition does not exist as the
government is the only seller

4. Socialist economy - a system based on the belief that democratic means should be used to distribute
wealth evenly throughout a society.

Characteristics:
 Some form of private enterprises exist but the state owns major resources.
 Government ownership of productive resources (major/key industries) and all other activities are left
to individuals.
 Planning
 Redistribution of income

5. Mixed Economy – a blend of market system and some form of government regulation and control.

Characteristics:
 No absolute free enterprise
 Guided free enterprise
 Private ownership of resources exists side by side with substantial public ownership of resources and
government participation in economic activities
.

LEARNING ACTIVITY 2

Direction: Identify some of the advantages and disadvantages of the economic systems
listed below.

Economic Systems

Economic System Advantages Disadvantages

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CAPITALISM

COMMUNISM

MIXED ECONOMY

SUMMARY

The three fundamental economic problems are the concerns of every economy. How a country responds
to these problems depends upon the prevailing economic system; whether capitalism, communism, socialism
or mixed economy.
Consumption, production, distribution and growth overtime are the basic decision problems that
households, firms, the government and society must consider in order to properly manage their resource.

REFERENCES

A. BOOKS

Azarcon, Ernie Roy S. et al.(2005). Principles of Economics with Taxation and A.R. Baguio City. Valencia
Educational Supply.

De Guzman, Rachele D., et al. (2013). General Economics, Taxation and Agrarian Reform. Meycuayan City,
Bulacan. IPM Publishing.

Medina, Roberto G. (2003). Principles of Economics. Manila. Rex Book Store.

Miranda, Gregorio S. Introductory Economics. (2001). L and G. Business House.

Nebres (2008). Economics: Concepts, Theories and Applications. Mandaluyong City: National Book Store.

Omas-as, Roberta L. (2008). Introductory Economics. Q.C.: Great Books Publishing.

Pagoso, Cristobal M. et al. (1996) Introductory Economics. Manila: Rex Book Store.

Villegas, Bernardo M. Guide to Economics for Filipinos. Manila: Sinag Tala Publishers. 2001.

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Viray Jr. et al. (2011). Macroeconomics Simplified. Quezon City. National Book Store.

Viray, et al. (2011).

B. ONLINE SOURCES

https://www.economicshelp.org/blog/21651/economics/basic-questions-of-economics/

https://www.gaebler.com/Three-Basic-Economic-Questions.htm

https://www.freeeconhelp.com/2011/06/three-fundamental-questions-every.html

https://corporatefinanceinstitute.com/resources/knowledge/economics/economic-system/

https://blog.udemy.com/types-of-economic-systems/

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